Restrictive interpretation for the application of the 5% tax rate for SICAV sub-funds

In its recent judgments, the Municipal Court in Prague has supported the interpretation of the tax administration and rejected the application of the 5% corporate income tax rate to sub-funds of companies with variable share capital (SICAVs) if their shares are admitted to trading on a European regulated market and meet only the conditions under Section 17b(1) of the Income Taxes Act (ITA). SICAV sub-funds qualifying for the reduced tax rate must meet the investment restrictions set out in Section 17b(1)(c) of the ITA, otherwise, they are subject to the general 19% tax rate.

The dispute over the interpretation of the definition of the so-called basic investment fund in relation to SICAV sub-funds has been ongoing since the adoption of the amendment to the ITA following the amendment to the Act on Management Companies and Investment Funds (AMCIF), which entered into force on 1 January 2015.

In the government’s draft amendment to the ITA, the concept of a “basic investment fund” was introduced in order to narrow the application of the 5% tax rate only to selected taxpayers in order to prevent their purposeful establishment and abuse of the reduced tax rate. Thus, a basic investment fund was to be  (a) an investment fund under the AMCIF whose shares or share certificates are admitted to trading on a European regulated market, (b) an open-end mutual fund under the AMCIF, (c) a sub-fund of a SICAV under the AMCIF and an investment fund if it is a collective investment fund, (d) other investment funds meeting the investment restriction (i.e. more than 90% of the value of assets must be invested in listed investment instruments). However, a subsequent amendment deleted the separate category defined under (c) and explicitly subordinated the SICAV sub-fund only to entities tested for investment restrictions (i.e. under the current Section 17b(1)(c) of the ITA). The explanatory memorandum to this amendment states that the reason for this modification is to subordinate the SICAV sub-fund to the same conditions as regular investment funds. However, the explanatory memorandum fails to specify this concept in further detail.

On the basis of this legislative process, the Municipal Court in Prague concludes that if the legislator wanted to classify the SICAV sub-fund under the 5% tax rate when the condition of admission of its investment shares to trading on a European regulated market (and from 1 January 2019 also another condition under Section 17b(1)(a) of the ITA, i.e. no more than 10% of the corporate shareholders and the absence of business activity under the Trade Licensing Act) was met, the legislator would have expressly provided for this.

Another point of contention was the interpretation of the term “investment fund” under the AMCIF, to which Section 17b(1)(a) of the ITA refers. The AMCIF introduces a legislative abbreviation whereby where this Act [AMCIF] uses the term “investment fund”, “collective investment fund” and/or “qualified investor fund”, it means, in the case of an investment fund that creates sub-funds, a sub-fund of an investment fund, unless otherwise provided by this Act. If this legislative abbreviation is also applied for the purposes of the ITA, it would thus be possible to include a sub-fund of a SICAV under the term “investment fund” under the AMCIF without its explicit mention in the provision. However, the Municipal Court concludes that this legislative abbreviation is intended only for the purposes of the AMCIF or its implementing provisions and cannot be used for the purposes of the ITA.

The second line of argumentation for the application of the 5% tax rate to the SICAV sub-fund was the application of Section 17b(1)(b) of the ITA, which defines open-end mutual funds as the basic investment fund according to the AMCIF. According to Section 37(c) of the ITA, the provisions of the ITA applicable to an open-end mutual fund and a share certificate apply analogously to a SICAV sub-fund and investment shares. However, this argumentation was also rejected by the Municipal Court which stated that although the purpose of this provision is to unify the interpretation and regulation of similar institutes by means of a legislative abbreviation, it does not apply to certain provisions, inter alia, to Section 17b of the ITA, which contains a special regulation that takes precedence over the general regulation applicable to open-end mutual funds and share certificates.

Thus, in its judgments 10 Af 19/2022-79 and 10 Af 10/2023-54, the Municipal Court confirmed the restrictive interpretation of Section 17b of the ITA for SICAV sub-funds applied by the tax administration. As this is only a first-instance decision, it remains unclear at this stage how the Supreme Administrative Court will ultimately rule. We will keep you informed of further developments as they become available.

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